Managing Escrow During a COVID-19 Related Hardship
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Managing Escrow during a COVID-19 Related Hardship Freddie Mac is committed to providing payment relief and other assistance to borrowers when they encounter a financial hardship. This includes those that have been impacted by the outbreak and spread of the coronavirus disease (COVID-19). With Single Family Seller/Servicer Guide (Guide) Bulletin 2020-15, Freddie Mac introduced the COVID-19 Payment Deferral, which is tailored to borrowers with a COVID-19 related hardship. Prior to receiving a COVID-19 Payment Deferral, a borrower may be placed on a forbearance plan for a period of one to twelve months dependent on individual circumstances and the nature of the hardship. This quick reference outlines the requirements that will help you effectively manage escrow for loans on a COVID-19 forbearance plan or COVID-19 Payment Deferral. Specifically, this quick reference: ▪ Provides an overview of Freddie Mac’s COVID-19 forbearance and Payment Deferral offerings ▪ Provides key terminology related to escrow management ▪ Outlines the requirements for managing the escrow account during a COVID-19 related hardship ▪ Includes a month-by-month example of managing escrow before, during, and after a COVID-19 forbearance ▪ Lists additional resources for escrow and COVID-19 relief options If you have any questions after reviewing this quick reference, refer to Guide Chapter 8201 or contact our Customer Support Contact Center (800-FREDDIE). COVID-19 Forbearance Plan A forbearance plan is a written agreement between you and the borrower that reflects the terms of the forbearance, including whether the borrower may make either reduced or no monthly payments for a specific period of time. The length of each forbearance plan term must be for an appropriate length of time, based on the borrower’s individual circumstances and nature of the hardship and must be agreed upon with or requested by the borrower. An eligible borrower may be given an initial forbearance plan up to six months. If necessary, the length of the forbearance plan can be extended six additional months provided the total forbearance term does not exceed 12 months. Borrowers who qualify to be evaluated for a COVID-19 Payment Deferral will typically be transitioning from a COVID-19 forbearance. However, forbearance is not a prerequisite for eligibility. For additional information about Freddie Mac’s forbearance requirements, refer to Guide Sections 9203.12 through 9203.21and Guide Bulletin 2020-4. COVID-19 Payment Deferral The Freddie Mac COVID-19 Payment Deferral is an offering available to assist borrowers who were current or less than 31 days delinquent (i.e., have not missed more than one monthly mortgage payment) as of March 1, 2020, which is the effective date of the National Emergency Declaration related to COVID-19. The COVID-19 Payment Deferral does not permit capitalization of arrearages into the interest-bearing UPB and instead, permits an eligible borrower to bring the mortgage current by deferring the capitalized arrears into a non- interest-bearing principal balance that will become due at the earlier of the maturity date, payoff date, or upon transfer or sale of the mortgaged premises. The remaining Mortgage term, interest rate schedule (i.e., whether a fixed-rate Mortgage, an ARM or Step-Rate Mortgage) and maturity date of the Mortgage will all remain unchanged. For additional information, refer to Guide Bulletin 2020-15. April 2021 Freddie Mac Learning Page 1 Managing Escrow during a COVID-19 Related Hardship Escrow Terminology and Requirements Refer to the following table to ensure you are familiar with the following escrow terms and requirements: Escrow Term Requirement Freddie Mac requires that you establish a separate escrow custodial account for each Seller/Servicer number, even if you do not currently collect or plan to collect escrow money. You must open an escrow account for unplanned events such as partial payments or insurance claim proceeds. Escrow Custodial Account You must deposit into the escrow custodial account all funds collected on the borrower’s behalf. These funds are used to make payments for the borrower for items such as taxes and insurance. The escrow custodial account balance should never go below zero, even if allowed by the institution housing the custodial account. Escrow advances are amounts paid by the Servicer to satisfy payments due for taxes, insurance, or other expenses when the escrow account is not sufficiently funded to cover the full payment amounts. Escrow Advances If there is a deficit, you are required to advance funds to the escrow custodial account prior to remitting the amount due. You must include any escrow advances disbursed during the forbearance period in the deferred unpaid principal balance of the loan when calculating the terms for a COVID-19 Payment Deferral. If the mortgage has an escrow account, then at least annually, you must compute the required escrow payment based on reasonable estimates of assessments and bills to determine that enough funds are being collected to meet all escrow payments. You are not required to perform an escrow analysis for a COVID-19 Escrow Analysis Payment Deferral in the month of settlement and may perform the escrow analysis as regularly scheduled for the loan. However, if you choose to perform an escrow analysis, any escrow shortage that you identify at the time of the COVID-19 Payment Deferral cannot be placed into the deferred unpaid principal balance of the loan. You will not be required to fund any existing shortage. All funds held on behalf of the borrower are considered to be escrow funds. Escrow funds are categorized according to their source and purpose. County taxes and hazard insurance are two of Escrow Disbursements the most common types of escrow funds. Generally, insurance premiums are due and disbursed yearly while tax disbursements can occur twice throughout the calendar year. The amount by which a current escrow account balance falls short Escrow Shortage of the target balance at the time of the escrow analysis. The amount of a negative balance in an escrow account resulting Escrow Deficiency from the Servicer advancing and disbursing funds for payment of escrow items. April 2021 Freddie Mac Learning Page 2 Managing Escrow during a COVID-19 Related Hardship Escrow Term Requirement A repayment plan that you set up with the borrower to recoup the escrow shortage. At the time of an escrow analysis, you can either collect the shortage amount in a lump sum from the borrower along with their next scheduled mortgage payment or spread the escrow shortage repayment amount equally over a period not to exceed 60 months. Escrow Repayment Plan If the borrower is already on an escrow repayment plan, and a future escrow analysis identifies a subsequent escrow shortage, then you must combine the remaining amount due from the initial escrow shortage with the amount due as a result of the new escrow analysis. The repayment term for the newly combined balance can be extended to a period up to 60 months. For more details, refer to Guide Section 9206.15. You may waive or discontinue collecting escrow per the borrower’s request if the requirements outlined in Guide Section 8201.1(b)(ii) have been met. Effective February 1, 2021, you must have a written policy in place governing the circumstances under which an escrow account may be waived. If a borrower does not have an escrow account and you discover non-payment of any charge otherwise payable from escrow, and the borrower is not able to provide proof of payment within 30 days, then, when allowed by applicable law, you must begin to collect Escrow Account Waiver escrow for future bills. If, based upon the borrower’s individual circumstances and history, and taking into consideration the requirements in Guide Section 8201.1(c), you do not believe a force-placed escrow account is warranted, then you may submit an exception request via Workout Prospector® to Freddie Mac for review subject to Servicing Guide requirements and applicable law. Please see Guide Section 8201 and Guide Bulletins 2020-39 and 2020-46 for the requirements around waiving escrow, non-payment of escrow charges, and submitting an exception request. April 2021 Freddie Mac Learning Page 3 Managing Escrow during a COVID-19 Related Hardship Example: Managing Escrow Before, During, and After a COVID-19 Forbearance Let’s take a closer look at how escrow is managed when the borrower is placed on a COVID-19 forbearance plan and then accepts a Freddie Mac COVID-19 Payment Deferral. The following example provides a month over month view of the fluctuations occurring in the escrow account before, during and after the forbearance period. Overview The borrower has experienced a COVID-19 hardship and has contacted you for assistance. The borrower is placed on a six-month forbearance plan. According to the terms of the forbearance agreement, the borrower is not required to make a monthly payment. At the end of the forbearance plan, you determined the borrower was eligible for a Freddie Mac COVID-19 Payment Deferral. Contractual Monthly Mortgage Payment = $1,000 Annual Tax and Insurance Amounts Due = $3,590 $700 – Principal & Interest (P&I) portion $2,990 – Total Tax Amount Due $300 – Taxes & Insurance (T&I) portion $600 – Total Insurance Amount Due April 2020 The loan is current as of April 2020. The borrower sends the contractual monthly mortgage payment of $1,000 of which $300 is applied to escrow. The borrower has experienced a COVID-19 hardship and has contacted you for assistance. The borrower is placed on a six-month forbearance plan beginning in May 2020. Escrow Account Activity $300 deposited into account $0 withdrawn for tax and insurance disbursements. Ending balance is $1,200 May 2020 This is month one of the borrower’s forbearance plan.